Stocks Will Not Make You Rich

by: Roger Nusbaum

Stocks will not make you rich... but they can adequately supplement a reasonable income need. The equity market volume of late has been lousy and for years we have been hearing about various generations that are disillusioned with investing in stocks. This can create headwinds for equity prices, which leads to the title of this post. It also leads us to ponder whether the weight of apathy can weigh on returns, thus preventing people from getting rich in the equity market.

Contrast this with 15-20 years ago when people did become wealthy via stock market investing. The context here is not hundreds of millions wealthy but more like low to mid seven figures-- which is enough for many people to consider themselves wealthy. As some readers may know, I worked for most of the 1990s at Charles Schwab and had occasion to see individual accounts. I have specific recollections of seeing what looked like fairly normal accounts save for an enormous position in some stock like Dell (NASDAQ:DELL), Cisco (NASDAQ:CSCO) or Microsoft (NASDAQ:MSFT).

To be clear, this was not an everyday occurrence, just an occasional observation where someone was lucky enough or smart enough to have bought one of the great growers early on and hold on. Obviously I have no idea if any of these folks then went on to lose it all in the tech wreck, but the stock market did make these people rich for a time, even if not forever.

A week or two ago, one well known blogger picked up on this apathy and made a big deal about all of this serving as a contrary indicator to buy. Of course it could be a bell ringing, but questioning the effect of apathy on markets is probably the better question to address because it poses a greater threat to your financial plan.

What I mean by that is if the market goes up 15% per year from here for the next ten years, then any reasonably well diversified, "normal" equity portfolio will capture most of that lift and there will be a little less work to do. If, as I have been postulating for years now, equity returns continue to be below what we think of as normal, then that means the market will not make many of us rich and that we will have to accumulate what we need by doing more than just putting it into any old fund (I realize this is an over-simplification).

On my site, the context for doing more has meant an increased savings rate, living below your means, figuring out how to monetize a hobby such that it creates an income stream. And also finding other ways to relieve the portfolio's burden, such as seasonal work that lasts for a month or so or some sort of consulting type work. Consulting is not an empty suggestion here as I've written before about the former head of Prescott Fire's hazmat team teaching hazmat classes all over the state as a post-retirement gig.

From an investment standpoint, doing more has meant more of a tilt to yield and a larger allocation to foreign markets. I've never been in the end is nigh camp for U.S. equities. Rather, just of the opinion that returns would be muted for an extended period. Net net, this has been the case for a while and I believe it will continue. I also believe select foreign markets (look beyond the eurozone and Japan) will offer returns that are close to what most investors think of as being normal. If that turns out to be correct, then an increased allocation to foreign will go a long way to getting the job done. If normal returns from foreign turns out to be incorrect and if the U.S. struggles, then it places a lot more importance on the ideas mentioned in the above paragraph.

Personally, I would not be one to give up on equities. I have unyielding faith in achieving something close to normal returns over the long run, even if that means looking in other markets. However, I have also made a point of making sure I don't have to get 15% per year for my financial plan to work.